What is an Offer in Compromise? How the IRS settlement program works

• An Offer in Compromise allows certain taxpayers to settle their tax debt with the IRS for less than the full amount owed.
• To qualify, taxpayers must undergo a detailed financial review of their income, assets, and ability to pay.
• If an offer is accepted, taxpayers must strictly comply with all tax filing and payment requirements for the next five years.

IRS tax relief comes in several forms, but an Offer in Compromise (OIC) is the option most people think of when they hear “tax debt settlement.” You may have seen ads claiming you can pay back far less than you owe. While that’s possible in some cases, the reality is more nuanced.

An OIC is a formal IRS program for taxpayers who can’t afford to pay their full tax liability. To qualify, you must provide detailed financial information, and the IRS will closely evaluate your income, expenses, assets and overall ability to pay. Approval is not guaranteed, and many applications are denied.

If you’re considering tax forgiveness, it’s important to understand how the process works and what you may realistically qualify for. This guide explains how an Offer in Compromise works, who may be eligible and the potential risks to consider before applying.

What is an Offer in Compromise?

An Offer in Compromise is a formal IRS tax relief program that allows some taxpayers to settle their tax debt for less than the full amount they owe.

Karen Wallace, assistant professor at the Robert B. Willumstad School of Business at Adelphi University, explains: “An Offer in Compromise allows some taxpayers to settle their tax debts for less than the full amount owed. Generally, the IRS will consider an Offer in Compromise if a taxpayer cannot pay the full amount now or through a payment plan and collecting the full amount would create serious financial hardship.”

In simple terms, the IRS may agree to accept a reduced payment if your financial situation shows that paying the full amount isn’t realistic.

The IRS puts it this way: “We generally approve an offer in compromise when the amount you offer represents the most we can expect to collect within a reasonable period of time.”

In practice, that decision is based on a detailed review of your income, assets and allowable expenses to determine what the IRS believes you can reasonably afford to pay.

How does an Offer in Compromise work?

Applying for an OIC involves submitting an application, providing detailed financial information and waiting for the IRS to review your case and make a decision. Each application is evaluated individually, and the IRS offers an OIC Prequalifier tool to help estimate whether you may qualify and how much you might be able to settle for.

To apply, you’ll need to:

• Submit Form 656 to formally request a settlement
• Provide financial information using Form 433-A (individuals) or Form 433-B (businesses)
• Pay a $205 application fee, unless you qualify for low-income status or are applying based on doubt as to liability
• Include an initial payment, either 20% of a lump-sum offer or the first monthly payment under a payment plan

Low-income eligibility guidelines are included in Form 656 and are based on your household size and location.

Once your application is submitted, the IRS reviews your income, assets and allowable expenses. This process can take a year or longer, according to Jason Stanfield, Ph.D., CPA, and a member of the American Accounting Association.

As part of this review, the IRS uses a formula to estimate how much it can reasonably collect. Stanfield explains: “The IRS uses a formula which considers the taxpayer’s assets’ net realizable value, or the amount for which assets could be sold less any debts secured by the assets, probable future income in a 12–24 month period, and an allowance for living expenses to estimate the likelihood of collection of the full amount owed.”

Based on this calculation — known as your reasonable collection potential (RCP) — the IRS determines whether your offer is sufficient. If your offer is below that amount, it will likely be rejected. The IRS generally expects your offer to reflect the full amount it can reasonably collect within a set time frame, not a negotiated discount.

Types of Offer in Compromise

If your offer meets or exceeds the IRS’s calculation of your RCP, the agency may approve it under one of three categories:

• Doubt as to collectibility: Your income and asset equity are not sufficient to pay the full amount of your tax debt.
• Effective tax administration: You technically have the ability to pay, but doing so would create significant financial hardship or would be unfair due to exceptional circumstances.
• Doubt as to liability: There is a legitimate dispute about whether the assessed tax debt is correct. 

Offer in Compromise eligibility requirements

Like other forms of tax relief, an OIC has specific eligibility requirements. However, the review process is more detailed and involves a full financial evaluation of your situation.

Basic compliance requirements

Before the IRS will consider your application, you must meet the following baseline requirements:

• All required tax returns have been filed, including those with unpaid balances
• Estimated tax payments are current, if applicable
• You are not currently in bankruptcy or active bankruptcy proceedings
• If you have employees, all required federal tax deposits are up to date
• You have not had an OIC accepted within the past five years
• You have not repeatedly submitted incomplete applications without completing the review process 

Financial qualification

Once you meet the basic requirements, the IRS will evaluate your financial situation in detail. This includes your:

• Income and cash flow
• Bank account balances and available cash
• Home equity and other real estate holdings
• Retirement accounts and investments
• Vehicles and other valuable assets

The IRS also considers allowable living expenses based on national and local standards. Using this information, the agency calculates your RCP to determine whether you qualify and how much you may be expected to pay.

Why many Offers in Compromise are rejected

There are no guarantees that an OIC will be approved. While acceptance rates vary, IRS data and industry estimates suggest roughly 24% to 40% of applications are accepted, meaning many are denied.

Stanfield says: “When the RCP equals or exceeds the amount owed, an OIC is unlikely to be accepted.”

In other words, if the IRS believes you can pay your full tax debt over time, your offer will likely be rejected.

Other common reasons for denial include:

• Submitting incomplete or missing forms and documentation
• Failing to meet basic compliance requirements
• Misstating income or allowable expenses
• Underestimating the value of assets or available equity
• Offering less than the IRS’s calculated RCP

What happens if your OIC is accepted?

If the IRS accepts your Offer in Compromise, you’ll receive a formal acceptance notice outlining the terms of your agreement. The IRS will apply any nonrefundable payments to your tax debt (application fees are not applied to your balance), suspend most collection efforts and terminate any existing installment agreements. In some cases, the agency may still file a notice of federal tax lien.

Your offer may also be automatically accepted if the IRS does not make a determination within two years of receiving your application, excluding any time your case is under appeal.

To keep your agreement in good standing, you must meet strict ongoing requirements:

• Pay the agreed amount, either as a lump sum or through scheduled payments
• File all required tax returns on time and pay any taxes owed for the next five years
• Allow the IRS to apply any tax refunds issued during the agreement period to your remaining balance

If you miss payments or fail to stay compliant, the IRS can revoke the agreement and reinstate your full tax debt, along with penalties and interest.

OIC terms generally cannot be changed once accepted. However, the IRS may grant a one-time payment extension within a two-year period in limited circumstances.

Finally, certain details of accepted OICs — including your name, city, state, ZIP code, liability amount and offer terms — are made available for public inspection for one year after acceptance, as required by law.

What happens if your OIC is denied?

If the IRS denies your Offer in Compromise, you’ll receive a written notice explaining the decision. You have the right to appeal within 30 days by submitting Form 13711, Request for Appeal of Offer in Compromise.

In some cases, the IRS may return your application instead of formally rejecting it. This typically happens if you don’t meet basic compliance requirements, such as failing to file required tax returns or submit complete documentation. If your application is returned, you can address the issues and resubmit or request reconsideration within 30 days.

If your OIC isn’t approved, you may still qualify for other forms of tax relief, including:

• Penalty relief
• Currently Not Collectible (CNC) status
• Installment agreements

Each option has its own eligibility requirements and may provide a more realistic path based on your financial situation.

Risks and trade-offs of an Offer in Compromise

An Offer in Compromise can reduce the amount of tax debt you owe, but it also comes with important trade-offs.

• Full financial disclosure required: You must provide detailed information about your income, assets and expenses as part of the application.
• Nonrefundable application fee: The $205 fee is not refunded, even if your offer is denied.
• Lengthy review process: IRS evaluations can take a year or longer, and interest and penalties continue to accrue during that time.
• Strict ongoing compliance: If your offer is accepted, you must file and pay your taxes on time for the next five years.
• Loss of future refunds: Any tax refunds issued during the agreement period will be applied to your remaining balance.

How to know if an Offer in Compromise may be right for you

An Offer in Compromise may be worth considering if your tax debt is significantly higher than what you can realistically afford to pay. Start by comparing what you owe to your income, living expenses and available assets, such as home equity or savings that could be used to satisfy the debt.

It’s also important to weigh the commitment involved. Applying for an OIC requires full financial disclosure, a lengthy review process and strict compliance if your offer is accepted. Approval is not guaranteed, and the outcome may not match your expectations.

While the IRS does not require you to work with a professional, you may consider consulting a tax professional to better understand your options and your likelihood of qualifying.

Applying on your own vs. working with a tax relief company

You can work directly with the IRS when requesting an OIC agreement or get assistance from a tax professional or a legitimate tax relief company. The right approach depends on your comfort with complex financial paperwork and your specific tax situation.

Applying directly with the IRS

For those who wish to work directly with the IRS, the agency provides its Taxpayer Advocate Service page for information and assistance. Taxpayers must submit the same forms that a tax professional would, including Form 656, Form 433-A for individuals and Form 433-B for businesses, and pay the application fee if the low-income threshold does not apply. 

Working with a tax relief company

Some taxpayers choose to work with a tax relief company, such as those included in our overview of the Best Tax Relief Companies of 2026. Tax relief firms can provide preparation assistance and advice, as well as negotiate and communicate with the IRS on the taxpayer's behalf. 

However, it's essential to note that working with a tax relief company or any tax professional does not guarantee the expected results, as the IRS retains full authority over any OIC approvals or denials. 

Bottom line

An Offer in Compromise can provide meaningful tax relief if you genuinely can’t afford to pay your full tax debt. But it’s not a quick fix or guaranteed settlement.

The IRS will only accept an offer if it reflects the most it can reasonably expect to collect based on your financial situation. For many taxpayers, other options — such as installment agreements or CNC status — may be more realistic.

Before applying, take time to evaluate your finances, understand the requirements and consider whether the potential outcome justifies the effort and cost.

FAQs about Offer in Compromise

How much will the IRS accept for an Offer in Compromise?

For an OIC agreement, the IRS generally accepts an offer amount equal to or more than your RCP amount, which it calculates based on your income, assets and allowable expense standards. There is no specific settlement percentage. The amount must be in line with what the IRS believes it can realistically collect within a reasonable time.

Does an IRS Offer in Compromise hurt your credit?

An OIC itself does not directly affect your credit score, as the IRS does not report the agreement or related information to credit bureaus. However, federal tax liens, which appear in public records and are often associated with OIC agreements, can impact your financial standing with lenders. 

How long does an Offer in Compromise take?

The OIC process can take several months to a year or more. During this time, the IRS reviews your financial information and determines whether your offer meets its approval criteria. Delays are common if additional documentation is required, and interest and penalties can continue to accrue during that time. 

Can I apply for an Offer in Compromise myself?

You can apply for OIC or any other tax relief programs directly with the IRS by submitting the required forms and documentation. However, the process can be complex and requires detailed financial disclosures. Some taxpayers choose to work with a tax professional, though doing so does not guarantee approval or any specific outcome.